Suppose bank A, which faces a reserve requirement of 10 percent, receives a $1000 cash deposit from a customer. Assuming that it wishes to hold no excess reserves, determine how much the bank should lend. Show your answer on Bank A’s balance sheet. Assuming that the loan shown in Bank A’s balance sheet is redeposited in Bank B, show the changes in Bank’s balance sheet if it lends out the maximum possible. Repeat this process for three additional banks: C, D and E. Using the simple money multiplier, calculate the total change in the money supply resulting from the $1000 initial deposit. Assume that Banks A, B, C, D and E each wish to hold 5 percent excess reserves. How would holding this level of excess reserves affect the total change in the money supply?
Suppose bank A, which faces a reserve requirement of 10 percent, receives a $1000 cash deposit from a customer. Assuming that it wishes to hold no excess reserves, determine how much the bank should lend. Show your answer on Bank A’s balance sheet. Assuming that the loan shown in Bank A’s balance sheet is redeposited in Bank B, show the changes in Bank’s balance sheet if it lends out the maximum possible. Repeat this process for three additional banks: C, D and E. Using the simple money multiplier, calculate the total change in the money supply resulting from the $1000 initial deposit. Assume that Banks A, B, C, D and E each wish to hold 5 percent excess reserves. How would holding this level of excess reserves affect the total change in the money supply?
Chapter16: Monetary Policy
Section: Chapter Questions
Problem 1SQP
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Suppose bank A, which faces a reserve requirement of 10 percent, receives a $1000 cash deposit from a customer.
- Assuming that it wishes to hold no
excess reserves , determine how much the bank should lend. Show your answer on Bank A’sbalance sheet . - Assuming that the loan shown in Bank A’s balance sheet is redeposited in Bank B, show the changes in Bank’s balance sheet if it lends out the maximum possible.
- Repeat this process for three additional banks: C, D and E.
- Using the simple money multiplier, calculate the total change in the money supply resulting from the $1000 initial deposit.
- Assume that Banks A, B, C, D and E each wish to hold 5 percent excess reserves. How would holding this level of excess reserves affect the total change in the money supply?
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